The markets have reacted to the Budget with a sense of unease and disappointment. Maybe expectations were unrealistic, and we are unfair in expecting so much in the short period of time the FM had to prepare and present the Budget.
To start with the positives, the commitment to move ahead to implement the GST from April 1, 2010 is the biggest plus to my mind. While we may still see delays, we must try to push ahead on this major reform. The second big positive is the phasing out of the FBT, a hated and tiresome tax with serious procedural headaches. The decision to introduce a draft new direct tax code within 45 days is also a pleasant surprise, assuming of course that the new draft code will significantly ease taxpayer interaction with the government. The elimination of the surcharge on personal income tax, raising the MAT to 15 per cent and increasing allocations to most major infrastructure programmes are other good measures. The focus to make the new pension scheme attractive through fiscal measures is also a step in the right direction. Keeping with the STT and not going back to a capital gains tax is also a good move to my mind.
I think what has spooked the markets is basically the fiscal deficit. At 6.8 per cent at the Centre and probably upwards of 4 per cent at the states, we are clearly in unsustainable territory. The unwillingness to give a time-bound long-term fiscal target, or the gameplan to bring this deficit down is a very big negative to my mind. Waiting for the finance commission to give its report seems to be a case of ducking the issue. With a government borrowing programme of almost Rs 400,000 crore, interest rates can only go up from here. Thus while the government may be spending more to give a stimulus, the higher interest rates caused by all this spending will be a serious drag on economic growth. With this extent of resource pre-emption we are only further increasing our dependence on external capital to fund private sector capex. Our fiscal sustainability is very leveraged to getting back to high growth rates, but can we simultaneously finance 9 per cent GDP growth and a double-digit fiscal deficit?
The deficit numbers mentioned above seem to take credit for Rs 35,000 crore of 3G auction proceeds which is one-time, but we make no mention of the costs of the new food security act, which will come into being in all likelihood by the next Budget. This one new scheme may itself cost Rs 25,000-30,000 crore. We continue to spend without restraint, with expenditure rising by 36 per cent in 2010, but seem to have little idea on how to finance all this. PSU disinvestment cannot be the panacea for all our fiscal ills. Even if we do get Rs 25,000 crore a year through this route (too high an estimate to my mind) it will not solve our fiscal challenges. Through the laudable desire to make our growth more inclusive, we seem to be committed to a path of very high expenditure growth. This will have to eventually be paid for one way or another. Either we target our subsidies better and thus get more bang for the buck out of current spending, or taxes have to go up. While everyone understands that deficits will be high globally because of the economic downturn, India’s seems much more structural given the desire for big government and substantial funds transfer to rural India.
There also seemed to be a worrying lack of mention on structural reforms. Nothing on FDI limit hikes, no formal disinvestment target, nothing much on targeting subsidies beyond one more committee on petro-product pricing and some scheme(lacking detail) to shift fertiliser subsidies away from producers to consumers. It was almost as if the FM was trying to shy away from talking about these more structural type of measures. Does this indicate a worrying lack of consensus in the coalition or the Congress party itself on these issues? Are we still uncomfortable talking of disinvestment, easing FDI limits, subsidy targeting despite the exit of the Left? The Economic Survey had obviously raised hopes that this government meant business. But suddenly we have no mention of most of the things the Survey talks about. Nobody expected action, but at least a statement of intent would have been reassuring.
I think if the FM had spent more time on these type of structural issues, and made at least some announcements, even in the form of intentions/long-term targets etc, it would have captured the markets’ attention and enabled investors to focus on the long-term growth trajectory of the country. Instead, investors are almost totally focused on the fiscal deficit, its impact on interest rates and the lack of reform. Concerns on India’s rating are also back to the forefront.
In the end it comes down to a case of packaging. By not spending any time on structural issues, and giving no commitments on the trajectory and gameplan for getting the fisc under control, investors have begun to wonder whether UPA-II will go the same direction as UPA-I in terms of significant structural reform.
The Budget seems to be too much of a status quo document for a government which claims it is in a hurry to get us back to a 9 per cent GDP growth trajectory.
The markets have obviously sold off significantly, we may not have too much more downside from here (5-10 per cent) but neither can one make out a case for big upsides. More likely we will go into a holding pattern type of trading range, as the markets wait to assess the seriousness of the government in implementing the slew of suggestions highlighted in the Economic Survey.
This Budget has unfortunately failed to capture the imagination of investors, who feel that we will not get back to 9 per cent growth without serious structural reform. One can only hope that the next Budget in six months’ time will make the government’s intentions on this front clearer.
Akash Prakash, Chief Executive Officer, Amansa Capital Pte Ltd
